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Derivatives

Dim sum debut gives Far East a taste for bonds

Far East Consortium made a stunning bond debut earlier this year with a massively oversubscribed book, following it up a month later with an equally impressive showing by its subsidiary. But despite its recent success with bonds, it is happy to sit back and explore its options, writes Rev Hui.

The bond market has not always been kind to Far East Consortium. The Hong Kong based conglomerate tried to make its first foray into the bond market last November, going as far as pitching accounts with guidance of the 5.50% area for a five year US dollar denominated deal. Sadly for Far East, investors had begun to tire of Chinese property companies after heavy supply. A lukewarm response saw the deal pulled.

“It wasn’t an easy decision for us to try to tap the bond market because traditionally we’ve always relied on loans for our funding and we were able to do so very effectively,” said Chris Hoong, managing director of Far East Consortium. “But we went for it because we were hoping to expand our investor base and means of funding.”

So rather than switching its attention to other markets, the company waited for a better opportunity in the bond market. Three months later, it was back, deserting dollars and deciding to flex its muscles in dim sum.

The results were spectacular. Far East raised Rmb1bn ($162m) in the three year deal, double what it had originally planned, thanks to a huge book of Rmb3.3bn. 

“Flexibility and timing is the key for us,” Hoong said. “We were always watching the market and realised that there was a good opportunity with CNH as there was a lot of liquidity, so we decided to do a dim sum instead of a dollar bond.”

Seeing that the market was receptive, Far East took advantage of the momentum and quickly launched a second dim sum through its subsidiary Dorsett Hospitality International, just one month after making its bond debut.

Some 80 investors poured around Rmb2.7bn of orders into the deal for the hotel chain, again leaving the books hugely oversubscribed. The company took Rmb850m from the five year bond, using it to satisfy some of the investor demand from the first deal.

“For both deals, we did an immediate currency swap back to US dollars and we were able to gain from an arbitrage of around 50bp-75bp compared to issuing a conventional dollar bond,” says Hoong. “By doing so, we managed to establish a yield curve and also familiarise ourselves with investors.” 

To judge by the reception, investors were clearly happy to add Far East to their portfolios. Hoong puts this down to the company’s growing business and healthy balance sheet. According to Far East’s financial results ended March 31, revenues more than doubled to HK$3.7bn from HK$1.8bn compared to the same period last year, while the company has a healthy gearing ratio of 28.8%.

Future plans

Hoong is in no hurry to delve back into the market as the company’s funding needs for four to six new projects have already been achieved. The exact amount needed for the projects has not been revealed, but Far East had already raised HK$7.9bn through a mixture of short term and long term borrowings as of March 31. 

Even though there are no immediate fundraising plans, Hoong says Far East is constantly looking to diversify its capital sources and, if a good opportunity arose, it would definitely explore the option — whether loans or bonds. And he says the company often holds investor meetings to strengthen ties and relationships.

“Once you enter the market, it’s always going to be a long term commitment,” says Hoong. “In terms of bonds, we are still in the learning process, so it is very important to familiarise ourselves with investors and encourage them to understand us more.”

To help with investor sentiment, Far East is contemplating getting a credit rating, although Hoong concedes that the company’s earlier success with bonds proved that a rating was not always necessary.

“A rating will certainly help in the case of a global dollar issue as foreign investors might not be too familiar with our company and might use the credit rating as a reference,” Hoong says. “But our primary investor base comes from China, Hong Kong and Singapore, so most are already very familiar with us.”

The company is also considering setting up a MTN programme, although he says the idea is still at the planning stage and it could be a long time before anything concrete happens.

For the meantime, though, Hoong is happy to stick to what he calls Far East’s “wait and strike” strategy for its next entry in the bond market.  

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